Small Mid Cap Highlights - UOB Kay Hian 2019-11-27: More Privatisation Offers Could Raise Interest In Value Stocks

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FU YU CORPORATION LTD (SGX:F13) VALUETRONICS HOLDINGS LIMITED (SGX:BN2) OVERSEAS EDUCATION LIMITED (SGX:RQ1)

Small Mid Cap Highlights - More Privatisation Offers Could Raise Interest In Value Stocks

• The number of privatisations has increased significantly to 34 in 2019, from 14 in 2018. The recent privatisation of CITIC ENVIROTECH (SGX:CEE) at an attractive premium could raise interest in deep-value small-cap stocks.
• Deep-value stocks under our small cap coverage include FU YU CORPORATION (SGX:F13) (4.3x 2019F EV/EBITDA, yield of 7.4%), VALUETRONICS (SGX:BN2) (3.4x 2020F EV/EBITDA, yield of 5.2%) and OVERSEAS EDUCATION LIMITED (SGX:RQ1) (2019F yield of 8.9%).

WHAT’S NEW

Number of privatisations has increased significantly in 2019.

• We believe this is largely due to:
  1. lacklustre valuation;
  2. lack of funding requirements; and
  3. backing from new partners.
• These have led to major shareholders privatising their companies from SGX. The highest premium offered in 2019 was 195% vs the last closing price.
• See attached PDF report for the summary of past M&A Transactions in Singapore For 2019.

Exit offer for Citic Envirotech at an attractive premium of 68.5% over the 3M VWAP.

• On 6 Nov 19, CITIC ENVIROTECH (SGX:CEE) received an exit offer for a voluntary delisting from SGX. The exit offer price of S$0.55 appears attractive as it represents a premium of 68.5% over 3M VWAP and 48.6% over the last closing price. The implied P/B of 1.15x exceeds the company’s 1-year historical average and is higher than what its Singapore peers are trading at (0.67x for CHINA EVERBRIGHT WATER (SGX:U9E), 0.45x for SIIC ENVIRONMENT (SGX:BHK)). The offeror and concert party own 79.1% and have given irrevocable acceptance. This provides an opportunity for minority shareholders to exit at an attractive premium. See Citic Envirotech Share Price; Citic Envirotech Announcements.
• On the other hand, several offers that lapsed such as CHALLENGER TECHNOLOGIES (SGX:573) and INDOFOOD AGRI RESOURCES (SGX:5JS) have seen their share prices correct and dry up in trading liquidity. See Challenger Technologies Share Price; Indofood Agri Share Price.

STOCK IMPACT

Deep-value small-cap stocks are worth a relook.

• We believe deep-value names with high margin of safety have room for further re-rating, especially in the current uncertain macroeconomic environment which faces risks of a trade war and slower growth. Companies with high cash reserves and dividend yields can weather any downturn better than peers.

Deep-value names include Fu Yu, Valuetronics and Overseas Education.

• Their valuations remain attractive and investors could receive generous dividend yield while waiting for any catalysts, including takeovers, cost rationalisation and huge order wins:
  • FU YU CORPORATION (SGX:F13) trades at 4.3x 2019F EV/EBITDA and 6.3x 2019F ex-cash PE. Its net cash has increased to S$84.6m as of 3Q19, or 49% of its market cap. FU YU CORPORATION is diversifying to a more stable business model and is optimising as well as turning around its loss-making operations.
  • VALUETRONICS (SGX:BN2) trades at 3.4x 2019F EV/EBITDA and 5.2x 2019F ex-cash PE. Its net cash increased to HK$1,028m (S$174.8m) as of 2QFY20, or 52% of its market cap. VALUETRONICS continues to see good demand for connectivity modules used in the automobile industry
  • OVERSEAS EDUCATION LIMITED (SGX:RQ1) offers an attractive 8.9% dividend yield for 2019F. We expect net 11.2% in 2019 and 6.4% in 2020.

EARNINGS REVISION/RISK

• We made no changes to our EPS forecasts.
• Risks include forex, lower-than expected orders, and margin pressure from rising costs.

VALUATION/RECOMMENDATION

• FU YU CORPORATION: Maintain BUY and target price of S$0.27, based on 5.3x 2019F EV/EBITDA, pegged to peers’ average. See Fu Yu Share Price; Fu Yu Target Price.
• VALUETRONICS: Maintain BUY and target price of S$0.87, pegged to peers’ average of 10.9x 2019F PE. See Valuetronics Share Price; Valuetronics Target Price.
• OVERSEAS EDUCATION LIMITED: Maintain BUY and target price of S$0.46, pegged to 10.4x 2019F EV/EBITDA, a 14% discount to global peers’. See Overseas Education Share Price; Overseas Education Target Price.

SHARE PRICE CATALYST

• Additional customers and higher cost savings.
• Higher-than-expected dividends.
• Takeover offer.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-11-27

SGX Stock Analyst Report BUY MAINTAIN BUY 0.285 SAME 0.285

BUY MAINTAIN BUY 0.87 SAME 0.87

BUY MAINTAIN BUY 0.460 SAME 0.460